Analyzing the S&P 500 Index, also known as the SPX, can be quite complex due to its volatility and the numerous factors that can affect its performance. Recently, a breakout was observed in the SPX, allowing it to reach uncharted territory. However, several aspects of this breakout are raising concerns among market analysts and traders. Here are some of the potential issues with the SPX breakout.
To begin with, one of the primary factors raising uneasy questions among experts is the origin of the current rally. Typically, market rallies are established due to solid economic indicators or positive earnings reports, but in this case, the rally seems to have been catalyzed by short-covering and the reduction of underwater positions from hedge funds and trading institutions. This sort of rally can often be deceptive – appearing stronger than it actually is.
Secondly, the lack of broad participation in the SPX rally is also concerning. Generally, healthy breakouts come from a wide spread of companies in an index showing strength. On the contrary, this particular SPX breakout seems to be heavily reliant on a limited number of big tech names, often referred to as the FAANG stocks -Facebook, Amazon, Apple, Netflix, and Google. This skewed participation distribution is somewhat concerning as it signifies a lack of widespread confidence and can lead to an unstable growth picture.
Thirdly, the backdrop of the global macroeconomic situation may also impact the sustainability of this breakout. Multiple geopolitical events across the globe, including trade tensions, Brexit uncertainty, and concerns over global economic slowdown are all risks that could potentially unhinge the market. The interconnectivity of today’s global economy means that these risks cannot be isolated and hence, pose a significant threat to the breakout.
The fourth issue pertains to indicators and signals including the Relative Strength Index (RSI) which are currently showing overbought conditions. This implies the SPX may be due for a pullback or at least a period of consolidation. Moreover, the Momentum Index, a key indicator that measures the speed at which the price of an asset changes, is currently less favorable, thus corroborating concerns about the future sustainability of the breakout.
Lastly, the bearish divergences observed in several other key technical indicators, including the Moving Average Convergence Divergence (MACD) and other pattern recognitions, serve as a warning sign that the rally might not be as robust as it appears at first glance.
In summary, while the breakout in the S&P 500 index comes as a positive sign signaling potential market strength, there exist several preeminent concerns surrounding its origin, skewed participation, macroeconomic backdrop, overbought conditions, and bearish divergences in key technical indicators. Therefore, it makes sense for investors to approach this breakout with a degree of caution, while keeping a keen eye on fundamental and technical indicators. Understanding the possible pitfalls in the breakout can potentially save from unforeseen losses and assist in making informed trading decisions.
